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An EU-US Free Trade Agreement: a pathway to growth?

The United States (US) and the European Union (EU) are on the verge of initiating negotiations on a momentous transatlantic free trade agreement for which official negotiations are slated to begin early this summer. Currently, the 27 (soon to be 28 with the addition of Croatia later this year) member-states of the EU and the US have a combined population of about 800 million people, generating nearly half of the world’s GDP. Moreover, trade between the US and EU accounts for more than 40 percent of total world trade, which makes this trading partnership the largest and richest in the world.

Given the rise of the BRICS (Brazil, Russia, India, China, and South Africa) as well as other emerging markets, such a free trade agreement could reinvigorate the stagnant developed economies of Europe and the United States. Such an arrangement could enable greater openness and transparency, facilitate greater fluidity of peoples, goods, and services, and foster even freer markets. Proponents of the free trade deal estimate that an agreement could benefit the EU and US economies by as much as an additional 0.5 percent to their GDPs. Other estimates are even higher.

Despite the potential benefits there are a number of obstacles coming from both sides of the Atlantic. Major stumbling blocks come from the agricultural, public services, media, air transportation, and financial services sectors—with trade barriers from both the EU and the US. For example, genetically modified foods are (and have been) a major sticking point for US trade with the EU, while geographical indications for agricultural products, such as champagne and cheeses, are points of contention in the US concerning EU policies. Additional challenges include harmonizing regulations, labor concerns, subsidies, and protectionist tendencies. For example, the US and EU have strikingly different Internet privacy laws, which affect e-commerce in the respective markets. Furthermore, as the European and U.S. economies are already well integrated, this free trade agreement is, perhaps, counter intuitively more difficult. This is attributable to the fact that less contentious trade barriers have already been reduced due to historic ties.

Overcoming these difficulties, however, would further benefit the two economies. Harmonizing regulations could make the pharmaceutical approval process easier and more efficient—companies would go through one set of standards rather than multiple compliance criteria. Manufacturers could create products compatible with a market of 800 million people as opposed to two sets of products for a market of approximately 300 million people, and another set of products for a market of about 500 million. Such reforms could lower production, shipping, and transaction costs and increase efficiency, which could be passed on to the consumer and spur increased growth.

Critics of the plan worry that corporations will come to be the primary beneficiary and there could be a race to the bottom when it comes to environmental standards. Additionally, there are fears that freeing up both markets could lead to cultural dominance, particularly by the US in the entertainment industry.

In an increasingly globalized world, such a trade deal would substantially alter world trade and reaffirm the transatlantic partnership. Moreover, an EU-US free trade agreement would continue the modern trend of free trade agreements initiated in the 1980s and exemplified by the reforms bringing about the European Union itself, as well as other agreements such as the North American Free Trade Agreement (NAFTA).

It is apparent that coming to an agreement will require compromise on both sides of the Atlantic, both in Brussels and in Washington. However, recent economic inertia in the developed world calls for action by both US and EU lawmakers in order to stimulate growth. An EU-US free trade agreement could be just the shot in the arm that the proverbial doctor ordered.

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